BUENOS AIRES--President Mauricio Macri on Thursday asked Argentines for patience in weathering an economic crisis this year and pledged to increase social spending in the coming months, a day after reaching a $57 billion deal with the International Monetary Fund.
In a televised statement, Macri promised to increase social spending to protect the poor and acknowledged the coming months would be difficult for Argentines suffering from a sharp contraction in Latin America's third-largest economy.
Official data on Thursday showed that the share of Argentina's population living in poverty rose to 27.3 percent in the first half of the year, up nearly two percentage points from the second half of 2018. Macri, who is expected to seek re-election next year, had made reducing poverty one of the key aims of his four-year term and he asked Argentine's to keep faith in his government.
The IMF deal calls for austerity measures to balance Argentina's budget next year - excluding the cost of debt servicing. "We have difficult months ahead, but if we keep our eyes on the goal, the goals we've had since the beginning, we will reduce poverty," Macri said, adding that an economic adjustment was needed to end decades of cyclical crises in Argentina.
"We are setting out on the only path that will improve our lives, and the lives of our children," he said.
In an effort to restore investor confidence, and to bolster Argentina's battered peso currency, Macri's government agreed on a record lending package with the IMF on Wednesday. It includes a further $7 billion in funding versus a previous standby facility signed in June.
The peso, however, slipped on Thursday as investors worried the program, which assured the government's funding until the end of next year, could do more harm than good to the economy and leave foreign exchange markets volatile. The peso closed 2.9 weaker at 39.7 per U.S. dollar. It has lost more than 50 percent of its value this year despite the central bank hiking benchmark interest rates to 60 percent.
"The key still lies in implementation of the government’s fiscal squeeze, which would be one of the largest undertaken by a country in an IMF deal," Capital Economics wrote in a research note. "The risk of slippage ahead of elections in October 2019 is high."
The new IMF package boosts loan disbursements through the end of 2019 by $19 billion to assuage investor doubts over whether Argentina can meet its foreign debt obligations next year. A new monetary policy regime enshrined in the deal also halts large-scale market interventions by the central bank, after it spent $16 billion so far this year defending the peso. Economists said that could lead to volatility in the short term.
The programme introduces a trading band for the peso between 34 and 44 to the dollar, which depreciates daily at a rate equivalent to 3 percent per month. Below that rate, the central bank can sell up to a modest $150 million a day to support the peso.
Other than the central bank, there are few sellers of hard currency in the market following recent turbulence and the new rules could lead to price swings in the short term, Delphos Investment said.
New central bank chief Guido Sandleris, who took office on Tuesday after his predecessor unexpectedly resigned, is also tasked with shrinking its balance sheet and targeting zero growth in the monetary base over the next year.
Argentina's monetary base has been growing at more than 2 percent monthly. "This will imply a very severe liquidity squeeze and monetary contraction in real terms with obvious adverse implications for activity," said Alberto Ramos of Goldman Sachs.
